7 Fair value measurement
Fair value measurement
While the Group prepares its financial statements under the historical cost convention modified for measurement to fair value of investments carried at fair value and investment properties, in the opinion of management, the estimated carrying values and fair values of financial assets and liabilities, that are not carried at fair value in the financial statements are not materially different, since assets and liabilities are either short term in nature or in the case of deposits and performing loans and advances, frequently repriced. For impaired loans and advances, expected cash flows, including anticipated realization of collateral, were discounted using the original interest rates, considering the time of collection and a provision for the uncertainty of the cash flows.
Fair value hierarchy:
The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
- Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions.
- Level 2: Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
- Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes input not based on observable data and the unobservable input have a significant impact on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
Valuation techniques include net present value and discounted cash flow models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other inputs used in estimating discount rates.
The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
The Group uses widely recognized valuation models to determine the fair value of common and simple financial instruments and require little management judgement and estimation. Observable prices and model inputs are usually available in the market for listed equity securities. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.
If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
The following table shows the analysis of assets recorded at fair value by level of the fair value hierarchy as at 31 December 2020:
| Date of | Level 1 | Level 2 | Level 3 | Total | |
| Valuation | AED’000 | AED’000 | AED’000 | AED’000 | |
| Assets measured at | |||||
| fair value | |||||
| Investment properties | December 26, 2019 | – | – | 7,925 | 7,925 |
| At fair value through profit or loss | |||||
| Quoted equities | December 31, 2020 | 29,305 | – | – | 29,305 |
| Quoted debt instruments | December 31, 2020 | – | – | – | – |
| – | —————— | —————— | —————— | —————— | |
| 29,305 | – | – | 29,305 | ||
| ========= | ========= | ========= | ========= | ||
| At fair value through other comprehensive income | |||||
| Quoted equities | December 31, 2020 | 163,189 | – | – | 163,189 |
| Unquoted equities | December 31, 2020 | – | 8,056 | 42,398 | 50,454 |
| Investment in managed funds | December 31, 2020 | – | 1,053 | – | 1,053 |
| —————— | —————— | —————— | —————— | ||
| 163,189 | 9,109 | 42,398 | 214,696 | ||
| ========= | ========= | ========= | ========= | ||
| Assets for which fair value is disclosed | |||||
| Investment carried at amortized cost | December 31, 2020 | – | – | 3,673 | 3,673 |
| —————— | —————— | —————— | —————— |
The following table shows the analysis of assets recorded at fair value by level of the fair value hierarchy as at 31 December 2019:
| Date of | Level 1 | Level 2 | Level 3 | Total | |
| Valuation | AED’000 | AED’000 | AED’000 | AED’000 | |
| Assets measured at | |||||
| fair value | |||||
| Investment properties | December 26, 2019 | – | 7,925 | 7,925 | |
| At fair value through profit or loss | |||||
| Quoted equities | December 31, 2019 | 85,987 | – | – | 85,987 |
| Quoted debt instruments | December 31, 2019 | – | – | – | – |
| —————— | —————— | —————— | —————— | ||
| 85,987 | – | – | 85,987 | ||
| ========= | ========= | ========= | ========= | ||
| At fair value through other comprehensive income | |||||
| Quoted equities | December 31, 2019 | 296,944 | – | – | 296,944 |
| Unquoted equities | December 31, 2019 | – | 9,271 | 41,772 | 51,043 |
| Investment in managed funds | December 31, 2019 | – | 5,354 | – | 5,354 |
| —————— | —————— | —————— | —————— | ||
| 296,944 | 14,625 | 41,772 | 353,341 | ||
| ========= | ========= | ========= | ========= | ||
| Assets for which fair value is disclosed | |||||
| Investment carried at amortized cost | December 31, 2019 | – | – | – | – |
| —————— | —————— | —————— | —————— |
The fair values of the Group’s financial assets and liabilities that are carried at amortized cost approximate to their carrying amount as disclosed in these financial statements. For the long-term financial assets and liabilities, management does not expect to have a material difference between the carrying amount and the fair value.
Investments carried at fair value through profit or loss
Investments carried at fair value through profit and loss are listed equities and debt instruments in local as well as international exchanges. Valuations are based on market prices as quoted in the exchange.
Investments carried at fair value through other comprehensive income
Investments carried at fair value through other comprehensive income, the revaluation gains/losses of which are recognized through equity, comprise long-term strategic investments in listed and unlisted equities, Tier 1 Capital instruments and private equity funds. Listed equity and Tier 1 Capital instruments valuations are based on market prices as quoted in the exchange while funds are valued on the basis of net asset value statements received from fund managers. For unquoted equities, the financial statements provide the valuations of these investments, which are arrived at primarily by using Price Earning Multiple basis valuation. The valuation requires management to make certain assumptions about the model inputs, including forecast cash flows, the discount rate, credit risk and volatility and price earnings multiples. The probabilities of the various estimates within the range can be reasonably assessed and are used in management’s estimate of fair value for these unquoted equity investments.
Following is the description of the significant unobservable inputs used in the valuation of unquoted equities categorized under level 3 fair value measurement.
| Valuation technique | Significant unobservable inputs to valuation | Range (Weighted average) | Sensitivity of the input to fair value | |
| Unquoted equities | Price Earning Multiple Valuation Basis | PE Multiple | 10 – 15 | Increase / (decrease) in the PE Multiples by 1 would result in increase / (decrease) in fair value by AED 300 thousand.
|
PE Multiple is derived from comparable companies.
The effect of unobservable inputs on fair value measurement
Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumption could lead to different measurements of fair value. For fair value measurements in Level 3, changing one or more of the assumptions used to reasonably possible alternative assumptions would have the following effects.
| Effect on OCI | |||||
| Cash flow sensitivity | +1% Favourable | -1% (Unfavourable) | |||
| AED’000 | AED’000 | ||||
| 31 December 2020 | |||||
| Unquoted equities at fair value through OCI | 515 | (515) | |||
| =============== | =============== | ||||
| 31 December 2019 | |||||
| Unquoted equities at fair value through OCI | 564 | (564) | |||
| =============== | =============== | ||||
Transfers between categories
During the period, there were no transfers between Level 1 and Level 2 fair value measurements. The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurement in Level 3 of the fair value hierarchy:
| Unquoted equities at fair value through other comprehensive income | |||||
| 2020 | 2019 | ||||
| AED’000 | AED’000 | ||||
| Balance at 1 January | 41,772 | 87,281 | |||
| Gain / (Loss) in OCI | (3,089) | (5,984) | |||
| Purchases | 3,715 | – | |||
| Disposals | – | (39,525) | |||
| Transfer into Level 3 | – | – | |||
| Transfer out of Level 3 | – | – | |||
| —————————– | —————————– | ||||
| Balance at 31 December | 42,398 | 41,772 | |||
| =============== | =============== | ||||
The table below sets out the Group’s classification of each class of financial assets and liabilities and their carrying amounts as at 31 December 2020.
| Fair value through profit or loss | Fair value through other comprehensive income | Not measured at fair value | |||
| AED’000 | AED’000 | AED’000 | |||
| Assets | |||||
| Cash balances | – | – | 6,717 | ||
| Due from banks | – | – | 501,511 | ||
| Investment securities | 29,305 | 214,696 | 3,673 | ||
| Loans and advances | – | – | 2,133,353 | ||
| Islamic financing and investing assets | – | – | 60,381 | ||
| Investment in associates | – | – | 89,788 | ||
| Insurance receivables and contract assets | – | – | 111,774 | ||
| Interest receivable and other assets | – | – | 172,849 | ||
| ————————- | ————————- | ————————- | |||
| 29,305 | 214,696 | 3,080,046 | |||
| ============= | ============= | ============= | |||
| Liabilities | |||||
| Customers’ deposits and margin accounts | – | – | 1,923,959 | ||
| Due to banks and other financial institutions | – | – | 79,577 | ||
| Short term borrowings | – | – | 298,160 | ||
| Medium term loan | – | – | 25,000 | ||
| Unearned premiums | – | – | 79,368 | ||
| Gross claims outstanding | – | – | 57,196 | ||
| Lease liabilities | – | – | 3,461 | ||
| Interest payable and other liabilities | – | – | 181,442 | ||
| Provision for employees’ end of service benefits | – | – | 14,925 | ||
| ————————- | ————————- | ————————- | |||
| – | – | 2,663,088 | |||
| ============= | ============= | ============= |
The table below sets out the Group’s classification of each class of financial assets and liabilities and their carrying amounts as at 31 December 2019.
| Fair value through profit or loss | Fair value through other comprehensive income | Not measured at fair value | |||
| AED’000 | AED’000 | AED’000 | |||
| Assets | |||||
| Cash balances | – | – | 10,134 | ||
| Due from banks | – | – | 505,808 | ||
| Investment securities | 85,987 | 353,341 | – | ||
| Loans and advances | – | – | 2,452,030 | ||
| Islamic financing and investing assets | – | – | 90,850 | ||
| Investment in associates | – | – | 90,095 | ||
| Insurance receivables and contract assets | – | – | 107,532 | ||
| Interest receivable and other assets | – | – | 111,265 | ||
| ————————- | ————————- | ————————- | |||
| 85,987 | 353,341 | 3,367,714 | |||
| ============= | ============= | ============= | |||
| Liabilities | |||||
| Customers’ deposits and margin accounts | – | – | 2,470,807 | ||
| Due to banks and other financial institutions | – | – | 13,459 | ||
| Short term borrowings | – | – | 173,100 | ||
| Medium term loan | – | – | 100,003 | ||
| Unearned premiums | – | – | 94,890 | ||
| Gross claims outstanding | – | – | 58,851 | ||
| Lease liabilities | 8,374 | ||||
| Interest payable and other liabilities | – | – | 195,392 | ||
| Provision for employees’ end of service benefits | – | – | 14,573 | ||
| ————————- | ————————- | ————————- | |||
| – | – | 3,129,449 | |||
| ============= | ============= | ============= |
